OceanaGold Corporation

OceanaGold Corporation (TSX: OGC) is engaged in the exploration, development of gold and other minerals and has a presence across Philippines, New Zealand, and, to a lesser extent, the United States.

Key Highlights:

• Encouraging FY21 Outlook: The company expects its FY21 gold production within the range of 340-380 koz, reflecting a growth of ~20% over FY20. The increase was driven by the restart of its Didipio operations in Q4FY20, which was temporarily closed during the majority of FY20. All-In Sustaining Costs (AISC) for FY21 is expected in between USD 1,050 to 1,200/oz, lower than USD 1,276/oz recorded in FY20. Moreover, the company also expects its cash costs to reduce to USD 750 to 850/oz in FY21, from USD 866/oz in FY20. The decline in the cost structure coupled with higher production prospects augurs well for improved profitability and cash flows for the company.

Source: Company Presentation

• Ample Liquidity: As on December 31, 2020, the company reported the available liquidity of USD 229.0 million, including USD 179.0 million of cash and USD 50.0 million in the form undrawn credit facilities. We believe the current liquidity seems to be sufficient to cater to the working capital needs of the company.                                                   

Source: Company Presentation

• Reserves Update: At the end of FY20, the company reported an increase in Proven and Probable Gold Reserves by 0.75 Moz, including depletion which reflects a 14% y-o-y growth of 143 Mt at 1.32 g/t Au for 6.06 Moz. 

Q4FY20 Financial Highlights:

• OGC announced quarterly result, wherein the company reported revenue of USD 168.2 million, higher than USD 152.1 million in Q4FY19. The increase was driven by a higher average gold price USD 1,842/ oz, as compared to USD 1,485/oz in Q4FY19.

Source: Company Report

• EBITDA stood higher at USD 61.3 million, as compared to USD 45.2 million in the previous corresponding period (pcp). The growth was driven by lower cost of sales (USD 76.9 million v/s USD 81.5 million in pcp) coupled with improved sales.
• Net profit was recorded at USD 3.9 million, as compared to USD 8.7 million in pcp, due to an income tax expense of USD 10.2 million, as compared to an income tax benefit of USD 7.2 million in pcp.              

Q4FY20 Income Statement Highlights (Source: Company Report)

Riks: The company’s operations might be hindered by events like delay in execution of its upcoming projects, volatility in commodity prices etc.

Valuation Methodology (Illustrative): EV to Sales

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group has an impressive growth pipeline, wherein the company would introduce three new underground mines into production over the next three years. These projects are anticipated to add at least 75% of FY20’s production over the next five years, along with lower costs structures. The Management also guided its FY25 outlook, wherein the group would likely to deliver higher cash flows and lower capital investment, as it has invested in several value-accretive organic growth projects.             

Source: Company Presentation

We have valued the stock using EV to Sales based valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have considered peers like Northern Star Resources Ltd, Evolution Mining Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of OGC at the last closing price of CAD 2.31 on April 22, 2021.

One-Year Price Chart (as on April 22, 2021). Source: Refinitiv (Thomson Reuters)

Canacol Energy Ltd.

Canacol Energy Ltd. (TSX: CNE) is a natural gas exploration and production company with operations focused in Colombia. 

Key Highlights:

• Rising Demand for Natural Gas: The long-term perspective of the natural gas industry is likely to remain positive, driven by a change in demand from ‘fossil fuel’ to renewables. Moreover, the company derives the major business from Columbia, and the province plans to use more gas to meet its Paris Agreement CO2 Emission Target. We believe the group is highly poised to utilize the added opportunity arising from the sector.               

Source: Company Presentation

• Impressive Guidance: For FY21, the company expects its gas sales within the range of 153,000 MMscf/day to 190,000 MMscf/day, as compared to the 171,600 MMscf/day in FY20. Moreover, the company is focused on drilling twelve wells during the year, which includes nine exploration and three development projects. The company expect its capital investment of around USD 140 million, while most of it is allocated for the ‘Exploration Wells & Seismic’ segment.                                             

Source: Company Presentation

• Growing Momentum from the Caribbean market: The company’s assets are in Lower & Middle Magdalena Basins of Colombia, which is close to the Caribbean coast. Hence, in the recent past, the company took advantage of its location and catered to growing demand. Notably, the company cater to ~50% of the Caribbean gas demand, which is impressive. 

• Operational Update: On April 21, 2021, the company announced the results of an independent prospective resources evaluation of the Corporation’s VMM 2 and VMM 3 blocks, prepared by Boury Global Energy Consultants Ltd. The summary of the un-risked recoverable volumes is highlighted below.

Source: Company Report

FY20 Financial Highlights:

• CNE announced its full-year results, wherein the company reported total revenue of USD 278.805 million, reflecting a growth of 15% over FY19 mainly due to higher realized contractual sales of natural gas and LNG at 171,600 MMscf/day in FY20, v/s 142,603 MMscf/day in FY19.
• Total expenses stood at USD 170.397 million as compared to USD 144.443 million in the previous year. The quarter was marked by higher transportation expenses (USD 32.001 million v/s USD 22.557 million in FY19), an increase in depletion and depreciation (USD 64.539 million v/s USD 54.283 million in FY19), coupled with a slightly higher operating expense (USD 18.005 million v/s USD 17.138 million in FY19).
• Income before income taxes was recorded at USD 77.396 million, higher than USD 64.734 million in FY19.
• The group reported a net loss of USD 4.743 million, as compared to a net profit of USD 34.247 million in FY19. The decrease was primarily attributed to the inclusion of deferred income tax amounting to USD 51.370 million in FY20.

FY20 Income Statement Highlight (Source: Company Report) 

Risks: Volatility in the international oil and gas prices is likely to affect the company’s realization price, which might lead to lower margin and slide in cash flows.

Valuation Methodology (Illustrative): Price to CF based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company strategically lowered its crude oil income and has increased and prioritised the natural gas segment, which is a key positive looking at the growing demand for the renewable segment. Moreover, majority of the company’s revenues comes from the long-term contract ranging from 1 to 10 years, which augurs well for revenue stability. Moreover, the stock of CNE carries a dividend yield of ~5.9%, which is lucrative considering the persisting interest rate scenario. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Energy) median on NTM basis etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the last closing price of CAD 3.52 on April 22, 2021.

1-Year Price Chart (as on April 22, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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